Clients who believe we pay too
much attention to weak data have laid out threereasons why we are
wrong.

One, data points to slow growth
ahead but there are no signs yet for a very sharp slowdown
("bad news is not bad enough").

Two, weak data means the Fed will be on hold for
longer ("bad news is good news").

Three, the impact of US fiscal
tightening is ultimately transitory and when it
starts to fade, the
US economy will roar ("good news will follow bad
news").

Woo concedes that these are all
actually good points in that they coincide with the BAML house
view on the outlook for markets and the economy.

So, what happens next?

Woo reiterates his stance that
"different
asset classes are
pricing in very different scenarios for global growth" (read more
about that here). However, with correlations between U.S. stocks,
U.S. junk bonds, commodities, and emerging-market stocks "near
the bottom of the range since 2009," these different scenarios
could start to converge if investors remain confident in the U.S.
economy.

If that turns out to be the
case, Woo says the euro "may be one of the primary beneficiaries"
of such a phase shift, citing the following developments:

Italy has finally formed a
coalition government.

Portugal just announced
spending cuts to replace the measures that
its Constitutional Court rejected last
month.

Greece approved the reforms
for the conclusion of the next program review.

The Parliament in Cyprus
approved the program package that the government has agreed with the
Troika.

The European Commission has
given more time to all economies to
reduce their
deficits, including France.

"With the market still short the EUR, it seems to us that higher
EUR (against both the JPY and the USD) will be the obvious pain
trade in a scenario of a risk meltup," says Woo. "A break of
EUR/JPY above the technical resistance level at 130 could lead to
overshooting as trend followers take out the value players."

The April U.S. retail sales advance release out Friday is the
next big U.S. economic data point on the calendar and will give
another big clue as to where the U.S. economy is going, and how
much of an effect the government spending cuts implemented under
the sequester earlier this year are having an impact on the
economy.

"Everything seems to be pointing to a weak reading," says Woo.

Market economists surveyed by Bloomberg
predict total retail sales contracted 0.3% in April after falling
0.4% in March. Sales excluding autos are expected to be flat.